ESG performs better and raises more assets in difficult times
2020 has been an extraordinary year of change and upheaval, with severe market volatility in the early part, all accompanied by the effects of a worldwide pandemic and subsequent lockdown.
The origins of the pandemic remain unclear, but the effect of such a global health phenomenon has undoubtedly driven many to put sustainability and environmental concerns high on their requirement lists when investing.
And these days it is not the usual story of voting with the heart leading to underperformance in the portfolio. Sustainable and ESG funds have performed very strongly over this year.
Writing in this report, BlackRock, comments that Q1 2020 data from Bloomberg and Morningstar, as of 7 May, 2020 revealed more than 90 per cent of sustainable indices outperformed their parent benchmark during the period of the heightened market uncertainty and drawdown.
Meanwhile, there can be no doubt that money is pouring into the sector. ETF data providers ETFGI reported in August that ESG ETFs and ETPs listed globally broke through the USD100 billion milestone at end of July 2020. The products gathered net inflows of USD6.76 billion during July, bringing year-to-date net inflows to a record USD38.78 billion which is significantly higher than the USD12.37 billion gathered at this point last year and the USD26.71 billion gathered in all of 2019.
And it isn’t all about equities, either. Fixed income ETF specialists Tabula Investment Management, again writing in this report, notes that there are some key differences between ESG equities and ESG bonds. Tabula points out that in fixed income, there are also issues about the stewardship of the assets the fund owns.
“We don’t have voting rights but we can, for example, support collaborative initiatives. We also use credit and bond indices, so, while we don’t have direct control over index constituents, we can actively engage with index providers and encourage them to consider ESG factors in their selection criteria,” Jason Smith, CIO at Tabula Investment Management says.
EY’s 2020 report ‘How will ESG performance shape your future?’ found that overall, 98 per cent of investors surveyed evaluate non-financial performance based on corporate disclosures, with 72 per cent saying they conduct a structured, methodical evaluation.
“This is a major leap forward from the 32 per cent who said they used a structured approach in 2018,” the report says, observing that when this research series began back in 2013, more than a third of investors said that they conducted “little or no review of non-financial disclosures.”
The report also found that investors are building their understanding of the ESG reporting universe, factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework.
The report says that this research found strong evidence that investors see the TCFD framework as a very valuable approach for wider non-financial disclosures, beyond climate-related information.
The report says that as investors look to build insight into long-term value, investors expressed a strong desire for a formal framework for measuring and communicating intangible value, and a closer connection between mainstream financial and ESG reporting.
There is also increasing evidence that investors are holding companies accountable with 91 per cent of investors surveyed for the EY report saying that non-financial performance had played a pivotal role in their investment decision-making over the past 12 months.